News

A slew of new financial rules could make the big European firms even bigger

Starting today (Jan. 3), Europe’s traders will have to contend with thousands of pages of new rules that will radically change transactions in everything from bonds to stocks to commodities. The sweeping overhaul won’t be obvious for millions of people who don’t work in the industry, at first. But under the surface it will affect everyone.

The regulations are supposed to make European financial markets fairer, more competitive, and less likely to collapse into a crisis. But over time, the rules known as Markets in Financial Instruments Directive II(MiFID II), are likely to make big financial firms even bigger. To comply, brokers have to collect and distribute much more data about their transactions, and asset managers have stricter obligations to make sure they aren’t overpaying for their trade transactions.

Complying with these rules costs money. It has probably already cost banks and asset managers more than $2 billion, and meeting these requirements will eat up a bigger percentage of technology budgets for smaller firms than it will for the big ones, according to IHS Markit. “There’s always a cost to compliance that bigger companies may be able to handle more easily than smaller ones,” said Anish Puaar, an analyst at Rosenblatt Securities.

Starting today (Jan. 3), Europe’s traders will have to contend with thousands of pages of new rules that will radically change transactions in everything from bonds to stocks to commodities. The sweeping overhaul won’t be obvious for millions of people who don’t work in the industry, at first. But under the surface it will affect everyone.

The regulations are supposed to make European financial markets fairer, more competitive, and less likely to collapse into a crisis. But over time, the rules known as Markets in Financial Instruments Directive II(MiFID II), are likely to make big financial firms even bigger. To comply, brokers have to collect and distribute much more data about their transactions, and asset managers have stricter obligations to make sure they aren’t overpaying for their trade transactions.

Complying with these rules costs money. It has probably already cost banks and asset managers more than $2 billion, and meeting these requirements will eat up a bigger percentage of technology budgets for smaller firms than it will for the big ones, according to IHS Markit. “There’s always a cost to compliance that bigger companies may be able to handle more easily than smaller ones,” said Anish Puaar, an analyst at Rosenblatt Securities.

The person on the street probably won’t notice any difference between the pre and post-MiFID II world. But if it works as intended, he or she could accrue more money on retirement savings through lower transaction costs, which over time can amount to real money. If the system is seen as more stable and fair, that same person could be willing to investor more, making more capital available to businesses, potentially helping them expand and boost employment.

The reality, of course, is likely to be more mixed. The rules will have unintended consequences, some of which may not be helpful for savers, and regulators will likely have to tune some of them. MiFID II after all is a refinement in some ways to what MiFID I started a decade ago. The time might not be far away when bankers and asset managers can start planning for MiFID III.